SECCTION A

ANSWER ALL THE QUESTIONS IN THIS SECTION

1. Under a special whole life assurance contract, $1 will be paid immediately on death to a
life aged 40 if he dies after his 60th birthday and $2 if he dies before his 60th birthday. It
is given that A 40 = α 1 (at an interest rate 6%), A40 = α 2 (at 12.36%), A 401: 20 = β 1 (at 6%)

and A 401: 20
= β 2 (at 12.36%). Find an expression for the variance of the value of this
contract calculated at 6% in terms of α 1 ,α 2 , β 1 and β 2 .

(Total: 5 marks)

2. Five years ago a man, then aged exactly 35, effected a without-profit whole-life assurance
for a sum assured of $5,000 payable immediately on death under which true quarterly
level premiums were payable for a period of 25 years, or until earlier death.

In calculating the premiums, the life office allowed for initial expenses of 2% of the sum
assured and renewal expenses of 3% of each premium including the first.

Immediately before payment of the premium now due, the man wishes to convert the
policy to an endowment policy with guaranteed bonus for a basic sum assured of $4,000
payable on survival to age 65 or immediately on earlier death. Guaranteed simple
reversionary bonuses, at the rate of 4% of the basic sum assured, vest at the end of each
future policy year. Under the altered policy, premiums are to be payable annually until
maturity or earlier death.

Calculate the level annual premium required under the altered policy, assuming renewal
expenses as before and an alteration expense of $100.

Basis: Mortality: A1967/70 (Ultimate)

Interest: 4%
( IA) 1 = 1.51259
40: 25

(Total: 19 marks)

3. A life office issues a 10-year without-profit endowment assurance for aged 60. $10,000
is payable at maturity, or 25% of reserve held at the time of death is payable immediately
on death in the event of earlier death. Calculate the net single premium.

Basis: Mortality: a(55) Males (Select)

Interest: 6%

(Hint: Use Thiele’s differential equation.)

(Total: 8 marks)
4. A special 5-year policy is issued to a life aged 60. The death claim (payable at the end of
the year of death) is $100,000 and on maturity there is a survival benefit of $10,000.
Level annual premiums are payable in advance. Reserves are held by the office equal to
the net premium policy value using an interest rate of 4% and the A1967-70 ultimate life
table for mortality.

(i) Show that the reserve at the end of the first year is $2098.10 (assuming the policy is
still in force) and calculate the reserves at the end of each subsequent year assuming
the policyholder survives.
(5 marks)

(ii) The office profit tests the contract assuming initial expenses of 60% of the premium
plus $50, renewal expenses of $50, an interest rate of 7% and the A1967-70 select life
table for mortality. It is incorporating the reserves found in (i). The office sets the
premium of the contracts such that the internal rate of return is 10%. Calculate the
annual premium.
(20 marks)

(Total: 25 marks)

5. On 1st January 99, a couple both aged exactly 40 and subject to A1967-70 (ultimate)
mortality buy an annuity with the following terms. Premiums are paid annually in
advance and they cease after 20 years or at the first death if earlier. Immediately after
premiums cease, a continuous income at the rate of $10,000 per annum is provided. This
income will continue for 5 years after the second death and is in any case guaranteed until
31st December 2028. Calculate the premium paid. Interest: 4% p.a.

(Total: 18 marks)
SECCTION B
ANSWER ONLY ONE QUESTION IN THIS SECTION (either Question
6 or Question 7)
6. Let us consider the following multiple state model describing the AIDS. If a life is alive
and not infected by the HIV positive virus, it is in state 1. If it is alive infected by the
HIV positive virus but it has not yet developed symptoms of AIDS, it is in state 2. If the
life is alive and suffering from AIDS, it is in state in 3. State 4 denotes death. All
possible transitions are indicated in the diagram below.

1 → 2 → 3
] ↓ [
4
The transition forces are assumed to be constant. The forces of mortality from each of the
state 1,2 and 3 are 0.01, 0.01 and 0.5 respectively. The force of transition from 1 to 2 is
0.05 and the force of transition from 2 to 3 is 0.1. (All forces are per annum). Denote the
state a life is in by X(t) and define

Pij (t ) = Pr{ X (t ) = j X (0) = i}

and
Pii (t ) = Pr{ X ( s ) = i, for all s ∈ [0, t ] X (0) = i}

(i) Derive forward differential equation for P12 (t ) and P13 (t ) .

(6 marks)

(ii) Explain why Pii (t ) = Pii (t ) , for all i and t.

(2 marks)

(iii) Solving the equations in (i), find P12 (t ) and P13 (t ) .

(8 marks)

(iv) Under a special policy the following benefits are provided: A lump sum of
$20,000 payable at the time a life becomes infected by the HIV positive virus and
an income of $10,000 p.a. commencing on the day of a life develops AIDS and
payable continuously until death. The policy is only open to lives not yet infected
 by the virus. Calculate the single premium for the policy. The force of interest is
5% p.a.
(9 marks)

(Total: 25 marks)

OR
7. A pension fund provides the following benefits:

(i) On retirement due to age between ages 60 to 65, including compulsory retirement
at age 65, a pension of 601 th of pensionable salary for each year of pensionable
service;
(ii) On retirement before age 60 due to ill health, a pension of 601 th of pensionable
salary for each year of pensionable service the member would have completed on
retirement at exact age 60;
(iii) On death in service, a lump sum of twice the salary at the date of death together
with a return of the member’s own contributions accumulated with compound
interest at rate j% per annum.

Pensionable salary is defined as the average salary received in the five years immediately
before retirement.

Pensionable salary is all service as a member of the scheme and includes fractions of a
year. Salaries are reviewed on the anniversary of the members’ date of joining the
company.

Each member contributes 10% of pensionable salary.

Develop formulae to value these benefits at rate of interest i% for a group of members all
aged x nearest birthday on the valuation date. Define all symbols carefully you use and
state clearly all assumptions you make.

(Total: 25 marks)